India’s Plan to Cut Personal Income Tax

  • December 27, 2024
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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India’s Plan to Cut Personal Income Tax

Sub: Eco

Sec : Fiscal Policy

India is considering a personal income tax cut in the upcoming February 2024 Budget to support middle-class households and boost consumption amidst slowing economic growth.

Proposed Tax Cut Details

  • Target Group:
    • Individuals earning up to ₹15 lakh annually under the new tax regime (2020).
  • Current Tax Rates under the New System:
    • ₹3 lakh–₹15 lakh: Taxed between 5% to 20%.
    • Above ₹15 lakh: Taxed at 30%.
  • Comparison of Tax Regimes:
    • Old Tax Regime: Allows exemptions (e.g., housing rentals, insurance premiums).
    • New Tax Regime: Offers lower rates but eliminates key exemptions.
  • Objective:
    • Encourage taxpayers to opt for the new, simplified tax system.
    • Put more disposable income in the hands of the middle class to stimulate spending.

Potential Impact

  • Economic Boost:
    • Higher disposable income could spur consumption, particularly in urban areas.
    • May help counter sluggish demand in sectors like FMCG, automobiles, and durables.
  • Revenue Loss:
    • Exact figures remain unknown, but reduced tax rates could result in a lower revenue collection for the government.
  • Political Relief:
    • Address concerns of the middle class burdened by high inflation and stagnant wage growth.

Economic Context

  • Growth Concerns: India’s economy grew at its slowest pace in seven quarters (July–September).
  • Inflation Impact: High food inflation has reduced spending power, affecting demand across sectors.
  • Taxpayer Dynamics:
    • Majority of revenue is generated from high-income taxpayers earning over ₹1 crore annually.

Next Steps

  • The final decision on tax rate changes will be made closer to the Union Budget announcement on February 1, 2024.
  • A potential reduction in rates is likely to enhance the attractiveness of the 2020 tax regime, simplifying compliance and encouraging broader adoption.

This move is a critical fiscal strategy to balance relief for taxpayers, economic stimulation, and revenue sustainability.

economy India's Plan to Cut Personal Income Tax